Leading Indicators to Predict Recessions

How do economists predict recessions? How do we know if we are in a recession now?

One great tool to judge when recessions are occurring or are on the horizon is a business cycle index. Business cycle indexes are composite indexes of a variety of economic indicators that can signal peaks and troughs in the business cycle. They can also judge whether an economy is in a recession currently or poised to enter one within a few quarters.

The Conference Board Coincident Economic Index ® (CEI) is highly correlated with real GDP – an accounting of total expenditures of domestic consumers, businesses, governments, and foreigners in an economy. Coincident indicators can signal if an economy is in a recession presently. 

The Conference Board Leading Economic Index ® (LEI) is a predictive variable that anticipates (or “leads”) turning points in the business cycle by around seven months. The LEI can often signal if a recession is coming within the next two quarters. 

The US Leading Credit Index™, or LCI, is a broad measure of credit conditions and a subcomponent of the US LEI. It is an important leading indicator of financial sector activity, as tight credit conditions would reduce business investments and slow down the economy. (See Using the Leading Credit Index^TM to Predict Turning Points in the U.S. Business Cycle and Absorbing Global Shocks.) 

To understand which economies are signaling recession, see:

• The Conference Board Global Leading Indicators